US banks still in tight straits despite profits, bonuses

NEW YORK - US banks, at the center of the global economic crisis, reported robust earnings for the second quarter of 2009 even though many — especially smaller banks — remain in tight straits, experts say.

By (AFP)

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Published: Sun 9 Aug 2009, 2:19 PM

Last updated: Thu 2 Apr 2015, 3:44 AM

In the flood of financial results for the April-June period there was a clear breakwater between the nation’s large financial institutions, sheltered by the demise of rivals like Lehman Brothers in the financial storm, and regional banks, many of which are still bleeding red.

The four behemoths that emerged from the US financial system meltdown have raised enormous profits: 2.7 billion dollars for JPMorgan Chase, 3.2 billion for Bank of America and Wells Fargo, and even 4.3 billion for the worst-hit of the lot, Citigroup.

“These results come from the investment bank” side and not from commercial lending, which is crucial for economic activity, said Cesare de Novellis, an analyst at Meeschaert New York.

These profits came on the back of a powerful rally in equity markets and a renewed vigor in bond markets, he said.

Investment bank Goldman Sachs, whose general public activities are limited, saw quarterly profit jump 65 percent from a year ago, to 3.4 billion dollars.

The strong results have revived the debate over bonuses paid to traders, which seem to be heading for the stratosphere after laying low in recent months.

Citigroup, which was bailed out by the federal government with 45 billion taxpayer dollars, and Merrill Lynch, which agreed to a government-secured takeover by Bank of America to escape bankruptcy, found the means to pay bonuses last year of 5.33 billion and 3.6 billion dollars, respectively, according to a recent report by the New York state attorney general’s office.

The managing director of the International Monetary Fund, Dominique Strauss-Kahn, said he was “appalled” by the return of the big bonus culture that had promoted the risk taking responsible in part for the financial system crisis.

After a star Citigroup trader pressed the bank to pay him a 100-million-dollar bonus this year, the US House of Representatives passed a measure capping executive compensation at the large companies rescued by the government.

“President Barack Obama’s administration pushed the idea of reforming the financial system, but for the moment it only has succeeded in mopping up the losses of big banks,” De Novellis said.

The banks that have fattened their bonuses the most “already had reimbursed the public funds, so the government can no longer pressure them to limit” the payouts to their hot-shot traders.

The current euphoria may prove fleeting because the big banks are facing a tsunami of bad debts, which is already swamping their regional rivals. Those smaller banks, like KeyCorp and SunTrust, piled up losses in the second quarter.

“The regional banks, including small ones, have less diversified portfolios than the larger banks and tend to be more vulnerable to the local or regional economy,” said Charles Geisst, professor of finance at Manhattan College.

The regional banks have experienced an explosion of defaults, especially in the states hard-hit by the worst US recession since the Great Depression and the credit crisis, such as California and Georgia.

To date this year, US authorities have closed 72 banks, compared with 25 in all of 2008.

Geisst warned against two new ticking time-bombs for the big banks: large amounts of credit card exposure and commercial real estate loans.

“They cannot continue to thrive on investment banking for much longer,” he said.

In their latest report on the sector, Standard & Poor’s analysts said that “pressures of the credit cycle persist and are moving into commercial areas.”

Amid an economy struggling to emerge from a painful recession that began in December 2007, they cautioned that “credit losses could keep rising for another several quarters,” forcing banks to take tens of billions of dollars in charges.



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